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Iran might be boasting the world’s fourth-largest proven oil reserves and the second-largest natural gas deposits but its energy sector, hampered by years of mismanagement, sanctions and lack of advanced technology, is in dire need of new international investments.

To be sure, Iran has not been able to make its Organization of the Petroleum Exporting Countries’ (OPEC) quota since 2005, not to mention the return to the shah’s period of 6 million barrels per day (bpd). Importantly, Western companies with the technology needed to develop Iran’s energy sector are worried that US President Donald Trump will tighten the secondary sanctions that may leave them vulnerable to punitive measures.

Crude challenge

Iran has set itself an ambitious target: Boosting its oil production from 3.8 million bpd to 5 million bpd by 2020. However, the country needs huge foreign investment over the same period to achieve that target. Most estimates suggest that Iran will not produce more than 4.2 million bpd in the next decade.

The International Energy Agency (IEA) projects that Iran’s crude production will reach 4.15 million bpd by 2022. BMI Research forecasts annual oil production growth to an average 2.9 percent between 2017 and 2026, reaching 4.2 million bpd.

It will be a daunting task for the government of President Hassan Rouhani to increase crude production to that level without full-scale international engagement. Indeed, investment will be held back by corruption, political wrangling over finalization of the new Iran Petroleum Contract (IPC), and most importantly the uncertainty surrounding the Trump administration’s policy toward Iran.

Rising consumption

Meanwhile, Iran is set to be the largest driver of gas production gains in the Middle East and North Africa (MENA) region in 2016-2026, with the expected annual output to rise by almost 35 billion cubic meters per year (bcm/yr) from over 205 bcm/yr in 2016 to around 240 bcm/yr by 2026.

According to Iran’s sixth five-year development plan (2016-2021), Tehran is seeking to increase gas exports to 60 bcm/yr by 2022. That said, domestic demand is set to rise by 32 bcm/yr to 227 bcm/yr over the coming decade. BMI Research in its latest Iran oil and gas report estimates that domestic consumption has nearly doubled from 112 bcm/yr in 2006 to 195 bcm/year in 2016.

The country may face a bumpy road ahead to fulfill its aims to develop its energy sector.

Dr. Naser Al-Tamimi

Rising consumption is not the only problem Iran will face. Most of the country’s oil fields are mature and need to be reinjected with natural gas to raise their production rates. Cedigaz, a Paris-based industry research group, estimates Iran’s theoretical demand for gas for reinjection in oil fields is 93 bcm but estimates that Tehran in practice only allocated around one-third of that level last year.

Importantly, Iran needs $185-$200 billion worth of investments in order to achieve its intended aims for the development of the oil and gas sectors over the next decade. However, the prospect of further US sanctions against Iran could prevent foreign direct investment (FDI) from reaching the ambitious levels targeted by Tehran. To be sure, according to official figures, Iran attracted $3.6 billion in FDI in the 2016/17 fiscal year, which ended on March 20. This figure, although up from $2 billion in 2015/16, is well below the government target of an annual inflow of $15 billion.

Petrochemicals potential

The petrochemicals sector is an area where Rouhani’s government feels it can achieve substantive economic diversification and job creation. Iran is the second-largest producer of petrochemicals in the Middle East after Saudi Arabia.

Iran’s nominal petrochemical production capacity is around 65 million tons per year (mt/y), although the country produced more than 50 mt/y of petrochemicals in the last calendar year to March 2017, according to Iran’s official data. The sixth five-year development plan aims to produce 129 mt/y by the end of 2021, before reaching 180 mt/y by 2025, to overtake Saudi Arabia.

The Iranian government is looking to attract over $72 billion in foreign investment for 80 petrochemical projects. Nonetheless, the ability to meet these targets will depend on a high rate of growth in investment and exports. On top of the political complications, there are economic risks including global overcapacity, slowdown in China, Iran’s top customer, lack of access to foreign technology and low petrochemical prices in Iran, which are about 50-70 percent lower than global market prices. These factors are most likely to curb Tehran’s ambitions in this area.

Small renewables

Iran also needs to diversify its power mix by increasing the renewable share. Renewables is a small component of the overall mix, which currently has an installed capacity of 240 megawatts (MW), a drop in the ocean compared to its total nominal power- generation capacity, which stands currently at 76,832 MW or 76.8 gigawatts (GW). Looking forward, Rouhani’s government has ambitious targets to install 5 GW of renewable capacity over the next five years (and additional 2.5 GW by 2030).

Yet achieving such an ambitious goal faces many obstacles, including an inefficient grid network, bureaucratic hurdles and government economic interventionism. However, even if Iran succeeds in achieving these goals, they still represent less than 10 percent of Iran’s additional power-generation capacity over the next 15 years and less than 5 percent of its total power-generation capacity at that time.

Taken together there is no boom in Iran. The country may face a bumpy road ahead to fulfill its aims to develop the energy sector and thus achieve its economic development goals in general.

• Dr. Naser Al-Tamimi is a UK-based Middle East researcher, political analyst and commentator with interests in energy politics and Gulf-Asia relations. Al-Tamimi is authorof the book “China-Saudi Arabia Relations, 1990-2012: Marriage of Convenience or Strategic Alliance?” He can be reached on Twitter @nasertamimi and e-mail: [email protected]